Closing Old Unused Credit Cards
It’s generally best to keep than closing your old credit cards in use open in order to have a longer credit history, as well as a stellar credit score.
Credit scoring models give you a boost for maintaining existing credit accounts that are long-running and also for only using just a tiny amount of the limit on your credit.
When can I close my old credit card accounts?
There are a few instances where closing a credit card account may be beneficial. This includes when the card has an expensive apr, and it is not old enough to improve your credit.
What you should know before closing your old credit cards accounts
Closing your credit card account can affect your credit score.
It could be strange to keep the credit card account open when you’re not making use of it. It’s particularly true if you think closing your account will stop you from overspending, which is a good reason to do. However, closing a credit card could adversely impact your credit scores. Here are the reasons why;
It will increase your credit utilization ratio
Higher credit utilization is simply the sum of revolving debt that you currently are able to pay off in comparison to your credit limit. The lower your ratio is, the better your credit. It shows lenders that you can use a credit card wisely.
Experts advise maintaining your credit utilization at or below 30 percent in all instances, and the closer you are to zero the more favorable. Consider the impact of closing an account on your credit utilization prior to making the decision.
Decreases the age of old accounts
The age of your accounts also plays an important role in determining your credit score. In other words, it is the length of time you’ve been using credit. This makes up 15 percent or more of the FICO(r) score.
The closing of your credit account, most importantly those with the longest tenure–can reduce how old your account is.
Review your credit reports to determine the oldest credit card and, in the majority of instances for it to remain open.
This is also a great option when the credit card you’re thinking of closing has a large credit limit and canceling it will significantly reduce the credit available.
Are you worried about overspending?
- If you’re worried about the temptation to buy on your credit card, store it in a place that is difficult to get into, like the safe deposit box, and only have one card available in case of emergencies.
- You might want to think about paying cash for all purchases. However, you can make a single monthly charge on your credit card like the Netflix payments, then pay the balance each month via automatic debit. This will maintain a low credit utilization and your payment history clean while keeping your credit in excellent order.
- If you’re not able to manage your spending, or if closing your account appears as the only option to effectively handle your money, then doing this might be more beneficial than the short-term impact on credit.
- A credit card that’s not used or has an annual cost that you cannot afford is usually secure to shut down, as is a brand new account that you never utilize. The cancellation of the account is less likely to have negative effects on your credit rating than closing an old account.
Maintaining credit card accounts open the longest time possible is a good method to build and maintain a credit score, particularly in the event that you plan to obtain loans soon.
Review the validity of the account as well as its credit limit prior to closing it. However, take an inventory of the habits you’ve made in your daily spending as well as any fees that are associated with the card as well.
Each financial decision is a choice that is personal to you and while keeping accounts that are not used open is usually the best option, but you may find that shutting one down is the best option for your needs.